Battery storage takes central role in powering net zero

Often overshadowed by their counterparts in flashy electric cars, batteries for renewable energy storage are becoming increasingly important to countries’ net zero ambitions.

While solar and wind energy have the benefit of reducing reliance on carbon-emitting fossil fuels, the availability of these alternatives is entirely weather dependent. So, to address this problem — and stimulate the renewables sector — governments have recognised the need to support battery storage projects.

In the US, the Inflation Reduction Act offers people a tax credit for battery storage when it is part of a renewable energy investment, such as a rooftop solar installation. In 2021, the Biden administration also announced a plan to cut the cost of battery systems that can store energy for more than 10 hours at a time. In August of this year, it reported that businesses had committed at least $122bn to clean energy projects, including battery storage.

However, there is little homegrown technology. The US still imports 90 per cent of its battery volumes from China, according to Morgan Stanley investment bank. And, despite government incentives, the US will remain dependent on China and Asia for storage batteries as domestic investment has been lacking.

Similarly, Europe imports 80 per cent of its annual battery demand from China. To reduce this reliance, the EU has pledged $7bn in subsidies to stimulate production in the bloc, and is considering its own version of the IRA, which could incentivise funding for energy storage even further.

Other countries are ramping up incentives for battery storage, too, as they seek to reduce supply risk. South Korean conglomerates LG, SK and Samsung are benefiting from a $5.3bn financial support package set up by country’s government for battery makers. The trio have also “heavily invested in US-based production facilities and should benefit from a double dose of subsides from South Korea and the US IRA”, Morgan Stanley said in a July report.

Meanwhile, Japan has announced $2.6bn in subsidies to stabilise its battery supply chain. The government is providing $1bn for a battery plant developed by Honda and Japanese battery maker GS Yuasa.

Among the non-Chinese suppliers, Tesla — the electric-car maker — has been expand its battery storage operations. In 2019, it launched “Megapack”: a battery product specifically designed for utility-scale energy projects. A year later, it embarked on one of the world’s largest battery projects in the Australian state of Victoria as part of a government contract with the French renewable energy developer Neoen, It is being used to stabilise the energy grid in Victoria by smoothing the switches to and from solar and wind power. But it was dealt a setback in 2021 by a fire that took three days to put out.

In April, Tesla chief executive Elon Musk announced that the company was opening another Megapack factory in Shanghai. This facility, which is scheduled to go into production in the second quarter of 2024, could be capable of providing the equivalent of 40 gigawatt hours of energy storage a year.

While Tesla has long been a stock market darling, investors are buying in to other battery companies, as well. US-based storage provider Fluence Energy’s share price is up 39 per cent over the past 12 months, compared with a near 13 per cent rise in the S&P 500 index. Fluence serves utility scale electricity providers and analysts say it has been performing well thanks in large part to IRA incentives. Under the legislation, companies that buy from Fluence can qualify for a 10 per cent tax break because the company is based in the US. Fluence will also benefit from manufacturing tax credits provided by the act, says Graham Price, a senior equity research associate at Raymond James. These tax credits “should still serve as a nice tailwind”.

According to a Raymond James report that Graham co-authored last month, “Power storage for the grid represents a play on both climate megatrends: mitigation and adaptation.” And, as a leading provider of storage solutions, “Fluence is riding the wave of storage becoming mainstream,” the report noted. The business was spun out of Siemens, which still owns almost half of the company after it went public in 2021.

Other companies are working on products specifically to store solar energy. For example, US energy technology company Enphase Energy makes microinverters, which are storage tools that are crucial to the solar ecosystem as they convert electricity for use on grids.

In a sector report in June on share price prospects, investment research group Morningstar described Enphase as “one of the world leaders” in microinverters. A month later, president Joe Biden visited an Enphase manufacturing site in South Carolina to highlight the company’s contribution to renewable energy and cutting carbon emissions.

One of Enphase’s main rivals in microinverters is Israel-based SolarEdge Technologies. SolarEdge started by providing tools for residential solar panels, but has since expanded to the larger, utility market.

“We are seeing increasing battery attach rates — the ratio of Energy Storage System-to-Photovoltaic installations — for rooftop solar projects,” Price says. And he points to new California solar regulations adopted in December 2022 that will add $630mn in state funding for low-income people who install solar panels and battery storage on their homes.

Although 2023 is likely to prove a relatively flat year for solar, rooftop solar has been growing at about 15 per cent annually, with battery storage deployment even faster, Price notes. He suggests that will make the storage sector particularly attractive for investors in the months ahead.